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High Income Households Paid an Effective Tax Rate 16 times Higher than Low Income Households in 2010

2 min readBy: Kyle Pomerleau

Last week, the CBO released a report titled “The Distribution of Household Income and Federal Taxes, 2010.”

In this report they measured the distribution of the federal taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. burden by income quintile in 2010, compared it to previous years, and discussed how tax changes will likely change this distribution in 2013. They find that higher income households pay much higher effective tax rates than lower income households.

In 2010, the average effective tax rate for all households was 18.1 percent. This is the average combined effective rate of individual income taxes, social security taxes, corporate income taxes, and excise taxes. The top income quintile paid an average effective tax rate of 24 percent. The lowest quintile had an average effective rate of 1.5 percent. The top quintile’s effective tax rate of 24 percent is 16 times higher than 1.5 percent for those in the lowest quintile.

From the CBO: “Higher-income households pay much more in federal taxes than do their lower-income counterparts: They have a much greater share of the nation’s before-tax income, and they pay a much larger proportion of that income in taxes. Households in the top quintile (including the top percentile) paid 68.8 percent of all federal taxes, households in the middle quintile paid 9.1 percent, and those in the bottom quintile paid 0.4 percent of federal taxes.”

They also found that taxes changed the distribution of after-tax incomeAfter-tax income is the net amount of income available to invest, save, or consume after federal, state, and withholding taxes have been applied—your disposable income. Companies and, to a lesser extent, individuals, make economic decisions in light of how they can best maximize their earnings. . “Households in the bottom four quintiles received shares of after-tax income that were about 1 percentage point greater than their shares of before-tax income. For example, households in the bottom quintile received 5.1 percent of before-tax income and 6.2 percent of after-tax income, and those in the middle quintile received 14.2 percent of before-tax income and 15.4 percent of after-tax income. In contrast, households in the highest quintile received 51.9 percent of before-tax income and 48.1 percent of after-tax income.”

Since the mid-1980s, the average effective rate for all income quintiles has declined except the top 1 percent, whose effective tax rate is higher than it was in the mid-1980s.

The CBO predicts that the average effective tax rate for high income households will increase due to the expiration of parts of the Bush Tax Cuts and new Obamacare Taxes.

It is also important to remember that this does not include the effective tax rate on state and local taxes. These taxes happen to be more proportional than federal taxes and thus result in higher effective tax rates for all households.

To read more about the distribution of who pays taxes see our Chart Book and our new study “The Distribution of Tax and Spending Policies in the United States.